Why Vancouver’s “low property tax rate” is a non-factor to investors
It’s said often enough, “Vancouver’s property tax is too low” and it is claimed, “the lowest property tax in North America”.
This claim is so nonsensical as to amount to either a gross misrepresentation, or wilful ignorance about how property tax works and why the “rate of tax” is not the thing. Not here and not any other city in the world which levies property tax. Further, it is claimed that our our “low rate of tax” is a huge incentive to foreign investors and fuels speculation. This too, is a notion which the numbers do not support. It’s much like claiming that parking meter rates on Burrard will discourage wealthy buyers from purchasing a Saab.
First I will explain the issue around our “low property tax”. For comparison, let’s stick to Canada because US tax is different in too many ways. So sit down and buckle up because you may be shocked to learn that Vancouver’s single family home property tax is actually the highest in Canada. Yes, it really is. How can that be? How can so many published claims be dead wrong? Because they misrepresent the reality.
Every city has a mill rate so that, in theory, the amount of tax collected overall is consistent from year to year. That means that the more valuable a house, the bigger proportion of the share of needed tax revenue. If a city needs X to manage its budget, then X is divided by all the homes and apportioned based on value. X is meant to be constant (notwithstanding civic budget increases and inflation) and so as house prices rise into the stratosphere, the amount of tax revenue required to achieve X, is meant to remain the same. If house prices double, the city does not collect X times 2. Instead, the rate of tax reduces to keep X constant. It’s correctly meant to do exactly that.
Conflating property tax with income tax is entirely inappropriate. Those who complain that the rate of tax is too low seem to suggest that property tax should be treated like income tax and calculated on direct value. This makes no sense and is counter to tax law anyway as income tax is meant to be based on realized gain, not a held asset which is one value one year and another the next. None of our held assets, be it pensions or equity investments generally or taxed when the gain has not been realized. As I say, this concept is not unique as every city in the world taxes houses with a mill rate.
When some segments of Vancouver house prices crashed more recently by some 30%, you can be certain that property tax collected did not drop in line by 30%, or even close to that. The mill rate adjusted to keep the tax paid about the same. That’s the whole idea. If a $4 million house was paying about $10,000 in tax and is now worth $3 million, the homeowner will still pay $10k in tax thanks to our friend, the mill rate. That’s why complaining that our property tax “rate” is so low is not only misguided, but a gross misrepresentation of how property tax is meant to work.
Pick two similar size and quality houses in similar decent neighbourhoods in different cities and Vancouver comes out higher in most all cases. In homes over $5 million, with the school tax added, Vancouver taxes are way higher on a like for like basis. In the comparison below, the Montreal house is bigger and more palatial, but costs less, because it’s in Montreal, but the tax is much lower. Even on a tax per dollar basis, Vancouver’s rate is higher.
But it is said that our low tax rate is a boon for foreign investors and positively encourages speculation because of the lower carrying cost in Vancouver. A cursory examination suggests this is the case, but scratch the surface and it’s quick to see that this is just nonsense. A four bed house in a nicer part of Vancouver might cost $4 million. The same in Montreal could cost half that, but both pay about the same tax amount. That makes Vancouver’s tax rate half what Montreal’s is. That means an investor has half the carrying cost, right? Well, yeah, but it’s such small part of the picture and in the real world (where I like to live) the investment thesis just doesn’t support it. Let’s look closer.
In the illustration below I compare two similar homes in similar quality neighbourhoods of two Canadian cities, Vancouver and Montreal. The tax paid on both is almost identical per house, so that makes Vancouver’s tax “rate” half.
If you have $4 million to spend in each city, you get one house in Vancouver and two in Montreal. Many consider Vancouver to be in a real estate bubble, so a riskier investment than Montreal. We don’t know for a fact what will happen in two years, but the risk is real. The illustration below assumes a modest correction in Vancouver and modest gain in Montreal. This is a real world investment reality.
Because tax is half the rate in Montreal, each of the single houses pay about the same tax per house, but for $4m, you get to own two Montreal houses so you end up paying about the same tax in total on your $4m investment.
Rental income in Montreal is lower, but not by half, so you get more rent in Montreal because you own two houses. You can see that after two years, Montreal generates a potential gain of $468k over Vancouver, even with Vancouver’s “low rate of tax”.
In the next illustration, we buy only one house in each city. In Montreal, you just saved yourself $2m. What do you do with that? You invest it in a dividend paying blue chip company. Any Canadian bank stock will pay you more than 4% right now, but typically, 4% is more realistic. In this case, you can see the gain is almost a whopping $700k over Vancouver.
In the third case, let’s assume that house prices do not crash anywhere, but maintain their current level. In that case, there is no gain in either city, but Montreal still beats Vancouver by $282k.
So the point is, when you look at the whole picture, you can see that any investor with a modest grasp of finance would easily choose Montreal as an investment option over Vancouver, despite Vancouver’s supposed “attractive” property tax capitalization rate. That’s because the lower cap rate in Vancouver as it relates to tax is only a small part of the picture.